The Washington INsider

Proposal to merge SEC, CFTC will go belly up: Washington insiders

Rep. Frank's parting bill will meet tough resistance from Senate, Ag Committees

Nov 30, 2012 @ 2:46 pm

By Mark Schoeff Jr.

A proposal to combine two top financial regulators will have to overcome jurisdictional battles on Capitol Hill — one of Washington's timeless sticking points — if it's to become a big issue next year.

In a parting gesture, Rep. Barney Frank, D-Mass., introduced a bill on Thursday that would merge the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Mr. Frank, ranking member of the House Financial Services Committee, will retire when the current Congress concludes at the end of the month, and the bill will have to be re-introduced next year by his coauthor, Rep. Michael Capuano, D-Mass., a member of the House financial committee.

In dropping the bill this late in the congressional session, Mr. Frank is trying to build momentum for 2013. The idea already has bipartisan support in his committee. Republicans on the House financial panel called for a CFTC-SEC merger in their report on the MF Global collapse that they released earlier this month.

While Mr. Frank rides off into the sunset, his allies who remain behind face an uphill battle to overcome resistance to the idea in the Senate and on agriculture committees on Capitol Hill. The ag panels have jurisdiction over the CFTC, while the House Financial Services Committee and the Senate Banking Committee oversee the SEC.

Rep. Collin Peterson, D-Minn., ranking member of the House Agriculture Committee, opposes merging the agencies, according Liz Friedlander, Democratic communications director for the panel. On the other side of the Capitol, Sen. Pat Roberts, R-Kan., chairman of the Senate Agriculture Committee, also is against a merger, according to his spokeswoman, Sarah Little.

Beyond those two committees, there's a general lack of enthusiasm in the Senate, which rejected combining the agencies during the debate over the Dodd-Frank financial reform bill in 2010.

It's conceivable that even in retirement, Mr. Frank might try to persuade congressional colleagues.

“The existence of a separate SEC and CFTC is the single largest structural defect in our regulatory system,” Mr. Frank said in a statement. “Unfortunately, this is deeply rooted in major cultural, economic and political factors in America. Had we sought to merge those institutions in the overall financial reform bill, it would almost certainly have caused the defeat of that legislation. Now that the basic policies have been adopted to cover security and derivatives regulation, we can focus on the structural issue.”

The Senate, however, is unlikely to embrace a stand-alone House bill, according to Mark Calabria, director of financial services regulation studies at the Cato Institute.

“To get to the president's desk, it's going to have to be part of a broader package,” Mr. Calabria said.

The bigger problem is overcoming the agriculture committees' recalcitrance, according to Cornelius Hurley, professor of law at Boston University and director of its Center for Finance Law and Policy. Lawmakers on the ag panels can raise money from Wall Street firms, if CFTC policy remains on their agenda.

“Form is leading over substance here,” Mr. Hurley said. “For fundraising and [to protect] their own turf, they insist on continuing in the same capacity.”

Experts and market participants favor putting the agencies' functions under one roof.

“The combined regulator likely would be a more effective regulator for the issues that will arise in the markets of the future,” Steven Wallman, chief executive of Foliofn Inc. and a former SEC commissioner, wrote in an email. “The recent past has been, at best, barely manageable by the regulators; bold changes are needed, and this is at least part of one.”

The two agencies have had to work closely together to write Dodd-Frank regulations pertaining to derivatives, swaps and clearing houses. It hasn't gone smoothly, according to Mr. Hurley.

“They've been tripping all over one another in trying to implement the shadow banking provisions of Dodd-Frank,” he said.

Instead of moving the CFTC into the SEC, as Mr. Frank's bill would do, the merger should go in the reverse direction, according to Mr. Calabria.

“Despite MF Global, the CFTC has had a better track record than the SEC,” he said. “The SEC has tended to be more politicized.”

The political battles within the agency likely will pale compared to the ones that will be waged over merging it with the CFTC.


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